Tag: Relief from Royalty method

Under the Relief from Royalty method value is determined by reference to the hypothetical royalty payments that would be saved through owning the asset. The method has been applied in situations where intangibles are sold to a group company in a low tax jurisdiction only to be used exclusively by the seller under a royalty/license arrangement. The method is particularly useful in these round trip tax avoidance arrangements to neutralize the effect of the arrangement. See TPG 9.61 and example 16 in the Annex to chapter VI.

A relief-from-royalty model will not capture the value of all of the rights of ownership, such as the right to determine when and where a mark may be used, or moving a mark into or out of product lines. Nor does it capture the economic benefit in excess of royalty payments that a licensee generally derives from using a mark. Ownership of a mark is more valuable than a license because ownership carries with it the unlimited right and incentive both to put the mark to it’s most valued use and to increase it’s value. A licensee cannot put the mark to uses beyond the temporal or other limitations of a license and has no incentive to take steps to increase the value of a mark where the increased value will be realized by the owner.

Denmark vs H Group, April 2019, Tax Tribunal, Case No. SKM2019.207

April 9, 2019 / Business restructuring, Business Restructuring, Intangibles - Goodwill Know-how Patents, License of intangibles, Relief from Royalty method, Royalty and License Payments

Intangibles had been transferred from a Danish subsidiary to a US parent under a written agreement. According to the agreement the Danish subsidiary – which had developed and used it’s own intangibles – would now have to pay royalties for the use of trademarks, know-how and patents owned by the US parent. The tax authorities had issued an assesment on the grounds that the majority of the Danish company’s intangibles had been transferred to the US parent. In the assesment the value of the intangibles had been calculated based on the price paid when the US group acquired the shares in the Danish company. H Group argued that the transferred intangibles no longer carried any value and that the Danish company now used intangibles owned by the US group. The Tax Tribunal found that tax authorities had been entitled to make an assessment as the transaction had not been described in the Transfer pricing documentation. However, the Tribunal considered that the valuation ... Continue to full case

Norway vs Normet Norway AS, March 2019, Borgarting Lagmannsrett, Case No 2017-202539

March 19, 2019 / Business Restructuring, CUP, Intangibles - Goodwill Know-how Patents, Normet, Relief from Royalty method, Swiss, Tax depreciation, Valuation - DCF and CUT/CUPs

In January 2013 the Swiss company Normet International Ltd acquired all the shares in the Norwegian company Dynamic Rock Support AS (now Normet Norway AS) for a price of NOK 78 million. In February 2013 all intangibles in Dynamic Rock Support AS was transfered to Normet International Ltd for a total sum of NOK 3.666.140. The Norwegian tax authorities issued an assessment where the arm’s length value of the intangibles was set at NOK 58.2 million. The Court of Appeal upheld the tax assessment issued by the tax authorities and rejected the appeal. Click here for translation Norway vs Normet 190319 ... Continue to full case

US vs. Amazon, March 2017, US Tax Court, Case No. 148 T.C. No 8

Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing ... Continue to full case

US vs. DHL. April 2002, U.S. Court of Appeals

April 11, 2002 / Financial Transactions, Intangibles - Goodwill Know-how Patents, Intellectual property, Relief from Royalty method, Sale of the trademark, Trademark, Valuation, Valuation - DCF and CUT/CUPs

When DHL sold the “DHL” trademark to DHL International, the IRS disagreed with DHL’s evaluation of the arms-length price of the intellectual property and used its authority under Section 482 to reallocate income and impose penalties. DHL appealed the IRS ruling and the tax court upheld the IRS allocation to DHL. In this decision the U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482 to the sale of the trademark and the $100 million valuation for the intangible asset, but reversed the tax court’s rejection of a $50 million value of the foreign trademark rights, as asserted by DHL. DHL April 11 2002 United States Court of Appeals And the prior decision of the Tax Court US-vs.-DHL.TCM_.WPD ... Continue to full case

US vs NESTLE HOLDINGS INC, July 1998, Court of Appeal, 2nd Circuit, Docket Nos 96-4158 and 96-4192

July 31, 1998 / Fair market value, Intangibles - Goodwill Know-how Patents, Nestle, Relief from Royalty method, Trademark, Valuation, Valuation - DCF and CUT/CUPs

In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to capture the value of all of the rights of ownership, such as the power to ... Continue to full case